George Osborne revamps Bank of England’s remit

Monetary activism.

In his budget, the British Chancellor of the Exchequer George Osborne has revamped the Bank of England’s remit in an effort to improve economy.

These changes, which are not as radical as some economists hoped, clarify that policy makers can prioritise growth if inflation remains under control. The BoE, however, will keep its inflation target unchanged at 2 per cent.

As part of the changes, amendments were made to the rules requiring the Governor to formally write to the Chancellor if inflation remains too high, while the option of switching to a nominal GDP target has been ruled out for the time being. The remit revamp highlights that HM Treasury wants more action from the Monetary Policy Committee (MPC).

The biggest change to the remit is for the BoE to consider what is known in central bank parlance as “explicit forward guidance”, whereby monetary authorities pledge to keep rates very low for a specified period, reported the Financial Times.

Jens Larsen of RBC Capital Markets told the FT: “This review is unlikely to materially alter the MPC’s framework: it will remain a flexible inflation-targeting regime.”

In its August inflation report, the BoE should report back on forward guidance.

Osborne’s appeal for the central bank to consider intermediate thresholds suggests that he is keen for the MPC to consider tying further policy actions to a return to growth or the creation of jobs.

The BoE already uses more non-committal types of forward guidance. Richard Barwell of the Royal Bank of Scotland (RBS) told the FT: “The MPC is already showing a huge amount of flexibility so I don’t think they can be asked to do much more.

“My concern is that the man on the street will believe that an unconditional promise has been made to keep rates low and the small print – that everything depends on inflation remaining under control – will get lost in the translation.”

The new letter-writing rule delays the deadline until the publication of minutes of MPC meetings. Under the existing system, BoE governor sent the letter on the day inflation figures were released.

Osborne said: “This Budget confirms the primacy of price stability and the inflation target in Britain’s monetary policy framework. But as we’ve seen over the past five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPC with setting out clearly the trade-offs it has made in deciding how long it will be before inflation returns to target.”